On the Benefits of Currency Reform
R. Vijay Krishna and
Oksana Leukhina ()
No 2018-21, Working Papers from Federal Reserve Bank of St. Louis
Money allows agents to achieve allocations that are not possible without it. How- ever, currency in most economies is a uniform object, and there may be incentive compatible allocations that cannot be implemented with a uniform currency. We show that currency reform, ie, changing the monetary base by replacing one currency with another, is a powerful tool that can enable a planner to achieve his desired allocation. Our monetary mechanism with currency reform is anonymous and features nonlinear pricing of consumption goods and future assets, as observed in practice. Our result suggests that currency reform is rarely seen in practice precisely because it is such a powerful tool and none but the most benevolent planner can be trusted to use it wisely.
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Journal Article: On the benefits of currency reform (2019)
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